UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-13641

 

PINNACLE ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		95-3667491 (I.R.S. Employer Identification No.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. YES þ NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES o NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ		Accelerated filer  o		Non-accelerated filer  o		Smaller reporting company  o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ

As of the close of business on November 4, 2009, the number of outstanding shares of the registrant’s common stock was 60,079,686.

 

 

PINNACLE ENTERTAINMENT, INC.
TABLE OF CONTENTS

PART I
Item 1. Financial Statements (Unaudited)			3
Condensed Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2009 and 2008			3
Condensed Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008			4
Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2009 and 2008			5
Notes to Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			25
Executive Summary			25
Results of Operations			26
Liquidity and Capital Resources			33
Contractual Obligations and Other Commitments			37
Critical Accounting Policies			37
Forward-Looking Statements			38
Item 3. Quantitative and Qualitative Disclosures About Market Risk			39
Item 4. Controls and Procedures			40
PART II
Item 1. Legal Proceedings			41
Item 1A. Risk Factors			42
Item 6. Exhibits			43
Signature Page			44
Exhibit 11
Exhibit 31.1
Exhibit 31.2
Exhibit 32

PART I

Item 1. Financial Statements

PINNACLE ENTERTAINMENT, INC.

		For the three months								For the nine months
		ended September 30,								ended September 30,
		2009				2008				2009				2008
		(in thousands, except per share data)
Revenues:
Gaming		$	227,353			$	222,063			$	694,546			$	680,030
Food and beverage			16,576				17,012				48,063				47,254
Lodging			10,895				11,709				29,352				27,067
Retail, entertainment and other			10,553				12,070				28,627				31,406
			265,377				262,854				800,588				785,757
Expenses and other costs:
Gaming			137,640				132,182				408,090				410,035
Food and beverage			16,113				17,806				47,620				48,914
Lodging			6,313				6,538				18,289				16,110
Retail, entertainment and other			6,159				8,213				16,017				20,740
General and administrative			58,099				60,299				174,916				182,824
Depreciation and amortization			25,756				29,665				78,142				89,172
Pre-opening and development costs			8,602				14,571				21,120				45,914
Write-downs, reserves and recoveries, net			306				976				1,019				8,197
			258,988				270,250				765,213				821,906
Operating income (loss)			6,389				(7,396	)			35,375				(36,149	)
Other non-operating income			56				843				292				2,466
Interest expense, net of capitalized interest			(18,696	)			(11,025	)			(51,448	)			(34,715	)
Gain on sale of equity securities			—				—				12,914				—
Impairment of investment in equity securities			—				—				—				(22,636	)
Loss on early extinguishment of debt			(8,831	)			—				(8,831	)			—
Loss from continuing operations before income taxes			(21,082	)			(17,578	)			(11,698	)			(91,034	)
Income tax (expense) benefit			(598	)			9,295				(3,806	)			18,620
Loss from continuing operations			(21,680	)			(8,283	)			(15,504	)			(72,414	)
(Loss) income from discontinued operations, net of income taxes			(241	)			(3,561	)			(778	)			47,514
Net loss		$	(21,921	)		$	(11,844	)		$	(16,282	)		$	(24,900	)
Net loss per common share—basic
Loss from continuing operations		$	(0.36	)		$	(0.14	)		$	(0.26	)		$	(1.21	)
(Loss) income from discontinued operations, net of income taxes			(0.01	)			(0.06	)			(0.01	)			0.79
Net loss per common share—basic		$	(0.37	)		$	(0.20	)		$	(0.27	)		$	(0.42	)
Net loss per common share—diluted
Loss from continuing operations		$	(0.36	)		$	(0.14	)		$	(0.26	)		$	(1.21	)
(Loss) income from discontinued operations, net of income taxes			(0.01	)			(0.06	)			(0.01	)			0.79
Net loss per common share—diluted		$	(0.37	)		$	(0.20	)		$	(0.27	)		$	(0.42	)
Number of shares—basic			60,070				59,972				60,048				59,961
Number of shares—diluted			60,070				59,972				60,048				59,961

The accompanying notes are an integral part of these condensed consolidated financial statements.

PINNACLE ENTERTAINMENT, INC.

		(Unaudited)
		September 30, 2009				December 31, 2008
		(in thousands, except share data)
ASSETS
Current Assets:
Cash and cash equivalents		$	154,921			$	115,712
Accounts receivable, net of allowance for doubtful accounts of $12,178 and $11,848			20,025				26,348
Inventories			6,192				6,425
Prepaid expenses and other assets			25,192				18,845
Total current assets			206,330				167,330
Restricted cash			9,370				9,318
Land, buildings, riverboats and equipment: (Note 1)
Land and land improvements			415,717				407,169
Buildings, riverboats and improvements			1,098,612				1,099,204
Furniture, fixtures and equipment			446,246				436,887
Construction in progress			259,765				127,407
			2,220,340				2,070,667
Less: accumulated depreciation			(511,612	)			(440,630	)
			1,708,728				1,630,037
Assets held for sale			2,667				2,687
Goodwill (Note 1)			16,742				16,742
Intangible assets, net (Note 1)			32,549				32,607
Other assets, net			53,948				60,503
		$	2,030,334			$	1,919,224
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	58,816			$	45,755
Accrued interest			15,031				11,010
Accrued compensation			42,950				41,574
Accrued taxes			26,867				17,089
Other accrued liabilities			52,784				55,060
Deferred income taxes			2,049				4,029
Current portion of long-term debt (Note 2)			9,553				89
Total current liabilities			208,050				174,606
Long-term debt less current portion (Note 2)			1,026,184				943,243
Other long-term liabilities			60,514				59,831
Deferred income taxes (Note 3)			3,822				2,198
Commitments and contingencies (Note 6)
Stockholders’ Equity
Preferred stock—$1.00 par value, 250,000 shares authorized, none issued or outstanding			—				—
Common stock—$0.10 par value, 60,079,686 and 59,981,181 shares outstanding, net of treasury shares			6,209				6,199
Additional paid-in capital			1,009,609				999,419
Accumulated deficit			(246,360	)			(230,077	)
Accumulated other comprehensive loss			(17,604	)			(16,105	)
Treasury stock, at cost, for both periods 2,008,986 of treasury shares			(20,090	)			(20,090	)
Total stockholders’ equity			731,764				739,346
		$	2,030,334			$	1,919,224

The accompanying notes are an integral part of these condensed consolidated financial statements.

PINNACLE ENTERTAINMENT, INC.

		For the nine months
		ended September 30,
		2009				2008
		(in thousands)
Cash flows from operating activities:
Net loss		$	(16,282	)		$	(24,900	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			78,142				89,596
Loss on disposal of assets			595				1,738
Impairment of buildings, riverboats and equipment			394				9,440
Impairment of investment in equity securities			—				22,636
Loss on early extinguishment of debt			8,831				—
Gain on sale of equity securities			(12,914	)			—
Provision for bad debts			1,431				2,158
Amortization of debt issuance costs			4,189				3,479
Share-based compensation expense			9,774				6,997
Change in deferred income taxes			11,095				25,253
Tax benefit from stock option exercises			—				(97	)
Insurance advances in excess of net book value			—				2,018
Change in long-term accounts, net			—				(2,030	)
Changes in operating assets and liabilities:
Receivables			2,954				(2,808	)
Prepaid expenses and other			(6,298	)			(4,129	)
Other long-term assets			2,846				—
Accounts payable			(2,330	)			(17,037	)
Accrued compensation			2,442				2,358
Accrued interest			4,021				4,401
Other accrued liabilities			3,315				6,559
Other long-term liabilities			(769	)			—
Net cash provided by operating activities			91,436				125,632
Cash flows from investing activities:
Capital expenditures			(146,204	)			(267,676	)
Change in restricted cash			(52	)			18
Purchase of intangible assets			(65	)			—
Kansas City application deposit			—				(25,000	)
Kansas City application refund			—				25,000
Proceeds from sale of equity securities			23,674				—
Proceeds from sale of property and equipment			373				312
Net cash used in investing activities			(122,274	)			(267,346	)
Cash flows from financing activities:
Borrowings under credit facility			80,299				215,000
Repayments under credit facility			(232,066	)			(140,000	)
Proceeds from Senior 8.625% Notes due 2017			443,687				—
Payment of Senior Subordinated 8.75% Notes due 2013			(129,438	)			—
Payment of Senior Subordinated 8.25% Notes due 2012			(76,547	)			—
Payments on other secured and unsecured notes payable			(67	)			(68	)
Proceeds from common stock options exercised			553				706
Debt issuance and other financing costs			(15,799	)			(511	)
Net cash provided by financing activities			70,622				75,127
Effect of exchange rate changes on cash and cash equivalents			(575	)			67
Increase (decrease) in cash and cash equivalents			39,209				(66,520	)
Cash and cash equivalents at the beginning of the period			115,712				191,124
Cash and cash equivalents at the end of the period		$	154,921			$	124,604
Supplemental Cash Flow Information:
Cash paid for interest, net of amounts capitalized		$	42,867			$	50,132
Cash payments (refunds) related to income taxes, net			3,272				(5,078	)
Increase (decrease) in construction related deposits and liabilities			14,028				(13,240	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

PINNACLE ENTERTAINMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1—Summary of Significant Accounting Policies

Basis of Presentation and Organization Pinnacle Entertainment, Inc. (“Pinnacle”) is a developer, owner and operator of casinos and related hospitality and entertainment facilities. We operate seven domestic casinos located in southeastern Indiana (“Belterra Casino Resort”); Lake Charles, New Orleans and Bossier City, Louisiana (“L’Auberge du Lac,” “Boomtown New Orleans” and “Boomtown Bossier City,” respectively); Reno, Nevada (“Boomtown Reno”) and St. Louis, Missouri (“Lumière Place Casino” and “President Casino”). Internationally, we operate one significant casino and several small casinos in Argentina (“Casino Magic Argentina”). We view each domestic property as an operating segment and aggregate our Argentine casinos into the “Casino Magic Argentina” reporting segment. References in this Quarterly Report on Form 10-Q to “Pinnacle,” the “Company,” “we,” “our” or “us” refer to Pinnacle Entertainment, Inc. and its subsidiaries, except where the context otherwise indicates.

In July 2008, we announced plans to sell or otherwise discontinue operations of The Casino at Emerald Bay in the Bahamas and officially ceased operations on January 2, 2009. We have classified the related assets as held for sale in our Condensed Consolidated Balance Sheets and have included its results in discontinued operations in our unaudited Condensed Consolidated Statement of Operations.

Within our construction and development pipeline, we have a number of projects at various stages of development. In south St. Louis County, we are constructing a casino named River City, which is expected to open in the spring of 2010. In Lake Charles, Louisiana, we have begun the foundation work on a second casino resort to be called Sugarcane Bay. We are also developing a casino-hotel in Baton Rouge, Louisiana. Each of these projects is subject to various regulatory approvals.

Principles of Consolidation The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and, therefore, do not include all information and footnote disclosures necessary for complete financial statements in accordance with generally accepted accounting principles (“GAAP”) in the United States. The results for the periods indicated are unaudited, but reflect all adjustments that management considers necessary for a fair presentation of operating results. The unaudited Condensed Consolidated Financial Statements include the accounts of Pinnacle Entertainment, Inc. and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

The results of operations for interim periods are not indicative of a full year of operations. These unaudited Condensed Consolidated Financial Statements and notes thereto should be read in conjunction with the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K filed with the SEC for the fiscal year ended December 31, 2008.

Use of Estimates The preparation of unaudited Condensed Consolidated Financial Statements in conformity with accounting principles used in the United States requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and (iii) the reported amounts of revenues and expenses during the reporting period. Estimates used by us include, among other things, the estimated useful lives for depreciable and amortizable assets, the estimated allowance for doubtful accounts receivable, estimated income tax provisions, the evaluation of the future realization of deferred tax assets, determining the adequacy of reserves for self-insured liabilities and mychoice customer rewards programs, estimated cash flows in assessing the recoverability of long-lived assets, asset impairments, goodwill and intangible assets, contingencies and litigation, and estimates of the forfeiture rate and expected life of share-based awards and stock price volatility when computing share-based compensation expense. Actual results may differ from those estimates.

Fair Value Effective January 1, 2008, we adopted the authoritative guidance for fair value measurements, which guidance provides companies the option to measure certain financial assets and liabilities at fair value with changes in fair value recognized in earnings each period. We have elected to not measure any financial assets and liabilities at fair value that were not previously required to be measured at fair value.

Fair value is defined in the authoritative guidance as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance also establishes a framework for measuring fair value and expands disclosures about fair value measurements. The fair value framework requires the categorization of assets and liabilities into three levels based upon assumptions (inputs) used to price the assets and liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment. The three levels are defined as follows:

	•		Level 1: Quoted market prices in active markets for identical assets or liabilities.
	•		Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
	•		Level 3: Unobservable inputs that are not corroborated by market data.

As of September 30, 2009, we had no assets measured at fair value on a recurring basis. As of September 30, 2009, our liabilities that are measured at fair value on a recurring basis are as follows:

		Balance				Level 1				Level 2				Level 3
		(in millions)
Liabilities:
Phantom stock units		$	0.8			$	0.8			$	—			$	—
Total liabilities at fair value		$	0.8			$	0.8			$	—			$	—

As of December 31, 2008, our assets and liabilities that are measured at fair value on a recurring basis are as follows:

		Balance				Level 1				Level 2				Level 3
		(in millions)
Assets:
Available-for-sale securities		$	10.8			$	10.8			$	—			$	—
Total assets at fair value		$	10.8			$	10.8			$	—			$	—
Liabilities:
Phantom stock units		$	0.6			$	0.6			$	—			$	—
Total liabilities at fair value		$	0.6			$	0.6			$	—			$	—

Available-for-Sale Securities: We classify all equity securities that we hold as current available-for-sale securities. At December 31, 2008, available-for-sale securities comprised 1.2 million shares of common stock in Ameristar Casinos, Inc., a competitor, with a fair value of $10.8 million. During the second quarter of 2009, we sold such securities for cash proceeds of $23.7 million and realized a gain of $12.9 million.

Land, Buildings, Riverboats and Equipment Land, buildings, riverboats and equipment are stated at cost. We capitalize the costs of improvements that extend the life of the asset. Construction in progress at September 30, 2009 and December 31, 2008 relates primarily to our River City project. Depreciation expense for the three and nine months ended September 30, 2009 was $25.7 million and $78.0 million, respectively, and $29.7 million and $89.2 million for the three and nine months ended September 30, 2008, respectively. Interest expense is capitalized on internally constructed assets at our overall weighted average cost of borrowing. Capitalized interest was $3.8 million and $8.7 million for the three and nine months ended September 30, 2009, respectively, and $8.6 million and $23.4 million for the three and nine months ended September 30, 2008, respectively.

Goodwill and Other Intangible Assets In accordance with authoritative guidance, goodwill and other indefinite-lived intangible assets are subject to an annual assessment for impairment, or more frequently if there are indications of possible impairment, by applying a fair-value-based test. There were no impairments to goodwill or indefinite-lived intangible assets during the three or nine months ended September 30, 2009 and 2008, respectively. We will perform our annual review of goodwill and indefinite-lived intangible assets in the fourth quarter of 2009.

Amortizing Intangible Assets Amortizing intangible assets consist of our concession agreement in Argentina, which provides us with certain exclusive rights to operate casinos in major cities of the Province of Neuquén. In June 2008, all of the 32 guestrooms of the hotel that adjoins the principal casino in Neuquén were opened under the terms of our concession agreement. Our exclusivity rights are to be extended from 2016 to 2021 with the completion of such luxury hotel. We are awaiting formal government approval of such extension. The unamortized costs of our concession agreement as of September 30, 2009 and December 31, 2008 were $634,000 and $753,000, respectively.

Gaming Taxes We are subject to taxes based on gross gaming revenues in the jurisdictions in which we operate, subject to applicable jurisdictional adjustments. These gaming taxes are an assessment of our gaming revenues and are recorded as a gaming expense in the unaudited Condensed Consolidated Statements of Operations. These taxes totaled approximately $67.0 million and $202 million for the three and nine months ended September 30, 2009, respectively, and $63.2 million and $197 million for the three and nine months ended September 30, 2008, respectively.

Pre-opening and Development Costs Pre-opening and development costs are expensed as incurred, consistent with authoritative guidance, and for the three and nine months ended September 30, 2009 and 2008 consist of the following:

		For the three months ended								For the nine months ended
		September 30,								September 30,
		2009				2008				2009				2008
		(in millions)
Atlantic City (a)		$	2.7			$	4.1			$	8.3			$	15.1
River City (b)			2.1				1.2				4.9				3.7
Baton Rouge			2.8				0.9				5.5				6.5
Sugarcane Bay			0.6				0.7				1.7				2.2
Kansas City			—				1.6				—				4.4
Lumière Place			—				0.2				—				6.2
Missouri Proposition A Initiative			—				5.8				—				7.0
Other			0.4				0.1				0.7				0.8
Total pre-opening and development costs		$	8.6			$	14.6			$	21.1			$	45.9

Comprehensive Loss Our comprehensive loss is as follows:

		For the three months ended								For the nine months ended
		September 30,								September 30,
		2009				2008				2009				2008
		(in millions)
Net loss		$	(21.9	)		$	(11.8	)		$	(16.3	)		$	(24.9	)
Foreign currency translation (loss) gain			(0.2	)			(1.0	)			(2.4	)			0.1
Post-retirement plan benefit obligation, net of income taxes (a)			—				—				0.9				(0.5	)
Unrealized gain on securities, net of provisions for income taxes			—				0.5				—				0.5
Comprehensive loss		$	(22.1	)		$	(12.3	)		$	(17.8	)		$	(24.8	)

Earnings per Share Diluted earnings per share assume exercise of in-the-money stock options (those options with exercise prices at or below the weighted average market price for the periods presented) outstanding at the beginning of the period or at the date of issuance. We calculate the effect of dilutive securities using the treasury stock method. As of September 30, 2009 and 2008, our share-based awards issued under our stock option plans consisted primarily of common stock option grants.

For the three and nine months ended September 30, 2009, we recorded a net loss. Accordingly, the potential dilution from the assumed exercise of stock options is anti-dilutive. As a result, the basic earnings per share is equal to diluted earnings per share for the three and nine months ended September 30, 2009. Securities that could potentially dilute basic earnings per share in the future that were not included in the computation of diluted earnings per share were 752,000 and 1,199,000 for the three and nine months ended September 30, 2009, respectively.

Recently Issued Authoritative Guidance

In June 2009, the Financial Accounting Standards Board (“FASB”) issued new authoritative guidance to establish the FASB Accounting Standards Codification as the single source of authoritative non-governmental GAAP. The guidance is effective for interim and annual reporting periods ending after September 15, 2009. We adopted the guidance effective July 1, 2009, and the adoption did not have a material effect on our Consolidated Financial Statements.

In June 2009, the FASB issued new authoritative guidance regarding a transfer of financial assets, the effects of a transfer on its financial statements, and any continued involvement in transferred financial assets. Additionally, the concept of a qualifying special-purpose entity was removed. The guidance is effective for annual reporting periods beginning after November 15, 2009. We do not expect the adoption of such guidance to have a material effect on our Consolidated Financial Statements.

In June 2009, the FASB issued new authoritative guidance for enterprises involved with variable interest entities. The guidance is effective for annual reporting periods beginning after November 15, 2009. We do not expect the adoption of such guidance to have a material effect on our Consolidated Financial Statements.

In August 2009, the FASB issued new authoritative guidance on measuring liabilities at fair value. The guidance addresses restrictions on the transfer of a liability and clarifies how the price of a traded debt security should be considered in estimating the fair value of the issuer’s liability. This guidance is effective for the first reporting period beginning after its issuance. We will adopt the guidance effective October 1, 2009. We do not expect the adoption of such guidance to have a material effect on our Consolidated Financial Statements.

A variety of proposed or otherwise potential accounting standards are currently under review and study by standard-setting organizations and certain regulatory agencies. Because of the tentative and preliminary nature of such proposed standards, we have not yet determined the effect, if any, that the implementation of any such proposed or revised standards would have on our Consolidated Financial Statements.

Note 2—Long-Term Debt

Long-term debt as of September 30, 2009 and December 31, 2008 consists of the following:

		September 30,				December 31,
		2009				2008
		(in millions)
Senior Secured Credit Facility		$	—			$	151.8
8.625% Senior Notes due 2017			443.8				—
8.25% Senior Subordinated Notes due 2012			201.0				276.7
8.75% Senior Subordinated Notes due 2013			9.5				133.7
7.50% Senior Subordinated Notes due 2015			380.6				380.2
Other secured and unsecured notes payable			0.8				0.9
		$	1,035.7			$	943.3
Less current maturities			(9.5	)			(0.1	)
		$	1,026.2			$	943.2

Senior Secured Credit Facility: On August 10, 2009, we repaid approximately $206 million of our $531 million revolving credit facility, which facility matures in December 2010 (“Credit Facility”), using proceeds from the 8.625% Senior Notes due 2017 discussed below. We did not re-borrow any funds prior to or on September 30, 2009, and therefore, as of such date, other than approximately $12.6 million of outstanding letters of credit, the Credit Facility was unutilized. On July 21, 2009, we entered into a fourth amendment to our Credit Facility (the “Fourth Amendment”). The Fourth Amendment implemented the following changes to the Credit Facility, among others:

•

The maximum permitted rolling four-quarter consolidated leverage ratio, as defined in the agreement, for certain of our fiscal quarters was increased as follows: the maximum permitted consolidated leverage ratio was increased to 6.50x for all fiscal quarters ending in 2009; 6.75x for the fiscal quarter ending on March 31, 2010; 6.50x for the fiscal quarter ending on June 30, 2010; and 6.00x for the fiscal quarter ending on September 30, 2010; and, for all fiscal quarters ending thereafter, the maximum permitted consolidated leverage ratio reduces to 5.00x. The original credit agreement was based on an earlier opening of River City and the consolidated leverage ratio covenant was scheduled to tighten before the currently anticipated opening of River City in spring of 2010.

•

The required minimum consolidated interest coverage ratio for each of our fiscal quarters ending on and after December 31, 2009 through June 30, 2010 was decreased by 0.25 percentage points.

•

The applicable margin for all revolving credit loans that mature on or prior to the non-extending revolving credit termination date (as discussed below) was increased by 0.50 percentage points.

•

We may from time to time: (a) request lenders, in their discretion, to convert their existing revolving-loan commitments or provide new commitments to a new tranche of extending revolving-loan commitments that mature on a date beyond the existing maturity date of December 14, 2010 (the “non-extending revolving credit termination date”) on such pricing terms (including the applicable margin and any upfront fees and commitment fees) as may be agreed upon by us and the lender(s) in an extending revolving credit-commitment agreement, and/or (b) request extending revolving loan commitments from new lenders, in each case without increasing the total amount of loans that may be outstanding under the Credit Facility beyond $625 million. Existing lenders are not required to extend the current maturity of their commitments or to provide additional commitments.

•

Each lender’s commitment was reduced by 15.0%, so that the aggregate commitment under the Credit Facility, as amended, is approximately $531 million.

The Credit Facility has, among other things, restrictive financial covenants and capital spending limits and other affirmative and negative covenants. As of September 30, 2009, we believe we were in compliance with all of the financial covenants in our Credit Facility.

On November 1, 2009, CIT Group, Inc. (“CIT”), one of the existing lenders under our Credit Facility, filed for bankruptcy under Chapter 11 of the Bankruptcy Code. As of September 30, 2009, CIT was a 4.6% participant in our Credit Facility. While CIT has funded its pro rata portion of our outstanding borrowings under our Credit Facility as of our last funding date of October 8, 2009, there can be no assurance that CIT will continue to do so in the future.

8.625% Senior Notes due 2017: On August 10, 2009, we closed an offering of $450 million in aggregate principal amount of new 8.625% senior unsecured notes due 2017 (“8.625% Notes”). The 8.625% Notes were issued in a private offering conducted pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended, at a price of 98.597% of par to yield 8.875% to maturity, with interest payable on August 1 and February 1, beginning February 2010. Net of the original issue discount, initial purchasers’ fees and various costs and expenses, net proceeds from the offering were approximately $434 million. Net proceeds from the offering were used to repurchase $75.0 million in aggregate principal amount of our 8.25% senior subordinated notes due 2012 (“8.25% Notes”); repurchase $135 million in aggregate principal amount of our 8.75% senior subordinated notes due 2013 (“8.75% Notes”), of which $9.5 million was repurchased subsequent to the quarter end on October 1, 2009; and repay the approximately $206 million in revolving credit borrowings under the Credit Facility. We expect to use the remaining net proceeds from the offering for general corporate purposes.

The 8.625% Notes are senior unsecured obligations and rank equally in right of payment with all of our existing and future senior debt, including debt under our Credit Facility. The 8.625% Notes are, however, effectively subordinated to our Credit Facility, which is secured by a first priority lien, as well as any other secured debt which may be issued in the future. The 8.625% Notes are guaranteed on a senior basis by certain of our current and future domestic restricted subsidiaries. The 8.625% Notes rank senior to our existing 7.50% senior subordinated notes due 2015 (“7.50% Notes”) and to our 8.25% Notes, and prior to the discharge of the indenture governing the 8.75% Notes, to our 8.75% Notes.

8.25% Senior Subordinated Notes due 2012: In August 2009, we purchased $75.0 million in aggregate principal amount of our outstanding 8.25% Notes pursuant to a cash tender offer. Tendering holders were paid an aggregate of approximately $79.1 million, representing 102.063% of par, plus accrued and unpaid interest. We used a portion of the net proceeds from our issuance of the 8.625% Notes to fund the tender offer. As of September 30, 2009, the aggregate principal amount of 8.25% Notes outstanding is $200 million.

8.75% Senior Subordinated Notes due 2013: On July 27, 2009, we commenced a cash tender offer for all $135 million aggregate principal amount of our outstanding 8.75% Notes. In August 2009, we purchased $125.5 million aggregate principal amount of such notes pursuant to such cash tender offer. Tendering holders were paid an aggregate of approximately $133.4 million, representing 103.167% of par, plus accrued and unpaid interest. We used a portion of the net proceeds from our issuance of the 8.625% Notes to fund the cash tender offer.

On August 31, 2009, The Bank of New York Mellon Trust Company, N. A. (the “Trustee”), as trustee under the indenture governing the 8.75% Notes, issued a notice of redemption on our behalf for the remaining $9.5 million in aggregate principal amount of 8.75% Notes. Pursuant to the notice of redemption, we exercised our option to call for redemption such remaining notes at a redemption price of 102.917% of the aggregate principal amount, together with accrued and unpaid interest up to but excluding the redemption date, which redemption date was October 1, 2009. On October 7, 2009, we formally discharged the indenture governing the 8.75% Notes. We used a portion of the net proceeds from our issuance of the 8.625% Notes to fund both the tender offer and redemption.

As the remaining $9.5 million of 8.75% Notes were not redeemed until October 1, 2009, the $9.5 million is classified as a current liability on the unaudited Condensed Consolidated Financial Statements as of September 30, 2009.

Loss on early extinguishment of debt: During the three months ended September 30, 2009, we issued $450 million aggregate principal amount of 8.625% Notes, and used a portion of the net proceeds to retire early other outstanding debts. Such early retirements resulted in a write-off of $8.8 million in unamortized premiums, unamortized debt issuance and other costs. We retired additional outstanding debt on October 1, 2009, resulting in a write-off of $482,000, which will be recorded in the fourth quarter of 2009.

Fair Value of Financial Instruments: The estimated fair value of our long-term debt at September 30, 2009 was approximately $1.0 billion, versus its book value of $1.0 billion. At December 31, 2008, the estimated fair value of our long-term debt was approximately $651 million, versus its book value of $943 million. The estimated fair value of our senior notes and senior subordinated notes was based on quoted market prices on or about September 30, 2009 and December 31, 2008 and the fair value of our senior secured credit facility was based on estimated fair values of comparable debt instruments.

Interest expense: Interest expense was as follows:

		For the three months ended								For the nine months ended
		September 30,								September 30,
		2009				2008				2009				2008
		(in millions)
Interest expense before capitalization of interest		$	22.5			$	19.6			$	60.2			$	58.1
Less: capitalized interest			(3.8	)			(8.6	)			(8.7	)			(23.4	)
Total interest expense, net of capitalized interest		$	18.7			$	11.0			$	51.5			$	34.7

The increase in interest expense was principally due to the replacement of less expensive revolver borrowings with the new, long term 8.625% Notes. We believe the longer maturity, fixed interest rate and fewer covenants of the 8.625% Notes warranted the higher interest rate, particularly in planning the capital structure necessary to fund our planned growth. The decrease in capitalized interest was principally due to the suspension of development activities in Atlantic City, partially offset by an increase in such activities attributable to our River City project.

Note 3—Income Taxes

Our effective income tax rate for continuing operations for the three and nine months ended September 30, 2009, was income tax expense of (2.8)% and (32.5)%, respectively, as compared to income tax benefit of 52.9% and 20.5% for the same periods in 2008. Our effective tax rates in the 2009 periods were affected by non-deductible items such as state gaming revenue taxes that are not deductible for Indiana state income taxes, foreign taxes of our Argentine subsidiary pursuant to a tax amnesty program currently offered by the Argentine government and anticipated results for U.S. operations for which no tax benefit is currently recognized. We determined that the certainty of the amnesty program offered temporarily by the Argentine government offset the potential economic value of eventually prevailing on certain disputed tax positions. Additionally, during June 2009, we received an informal notification from a field agent for the Indiana Department of Revenue challenging whether income and gain from certain asset sales, including the sale of the Hollywood Park Racetrack in 1999, and other transactions outside of Indiana, such as the Aztar merger termination fee in 2006, which we reported on our Indiana state tax returns for the years 2000 through 2007, resulted in business income subject to apportionment, and proposed a potential assessment of approximately $11 million, excluding interest and penalties, of additional Indiana income taxes. We disagree with the position suggested by the field agent as we believe that the income associated with these items is non-business income and we are in discussion with Indiana tax authorities regarding those preliminary proposed adjustments. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, management believes that the reserves for income taxes reflect the most likely outcome as of September 30, 2009. We adjust these reserves, as well as the related interest, in light of changing facts and circumstances.

Note 4—Employee Benefit and Other Plans

Share-based Compensation: As of September 30, 2009, we had approximately 6.9 million share-based awards outstanding, 14,000 of which are restricted stock awards and the rest of which are common stock options, with approximately 1.1 million share-based awards available for grant.

We recorded pre-tax compensation expense of approximately $2.1 million and $9.8 million for the three and nine months ended September 30, 2009, respectively, and $2.0 million and $6.9 million for the three and nine months ended September 30, 2008, respectively. The expense has increased primarily due to additional options granted to members of our Board of Directors. These grants, along with all previously outstanding unvested stock option grants to board members, became fully vested in May 2009, resulting in a charge of approximately $3.2 million. Theoretical compensation costs not yet amortized related to stock options granted totaled approximately $15.4 million and $25.8 million at September 30, 2009 and 2008, respectively, and the weighted average period over which such costs are expected to be recognized is approximately three years.

The aggregate amount of cash we received from the exercise of stock options was $98,000 and $553,000 for the three and nine months ended September 30, 2009, respectively, and $131,000 and $706,000 for the three and nine months ended September 30, 2008, respectively. The associated shares were newly issued common stock. There was no excess tax benefit resulting from the exercise of stock options for the nine months ended September 30, 2009 and 2008.

The following table summarizes information related to our common stock options under our stock option plans:

		Number of				Weighted Average
		Stock Options				Exercise Price
Options outstanding at January 1, 2009			7,378,540			$	14.73
Granted			258,500			$	11.08
Exercised			(91,505	)		$	6.05
Cancelled, Forfeited			(641,495	)		$	13.81
Options outstanding at September 30, 2009			6,904,040			$	14.80
Vested or expected to vest at a point in the future as of September 30, 2009			6,714,048
Options exercisable at September 30, 2009			4,668,840			$	13.74
Weighted-average value per granted option calculated using the Black-Scholes option-pricing model for options granted during the nine months ended September 30, 2009		$	6.61

401(k) Plan: During the second quarter of 2009, management decided to reduce the scope of a discretionary employee 401(k) matching program for 2008 and the first half of 2009. Amounts accrued in relation to this supplemental matching program were reversed during the second quarter of 2009.

Director Phantom Stock Units: As part of his annual retainer, each director receives $10,000 worth of phantom stock units on the date of the annual meeting of stockholders. Each phantom stock unit is the economic equivalent of one share of our common stock. Units of phantom stock are payable in common stock following the director’s cessation of service as a director for any reason, which shares have a value of $0.8 million as of September 30, 2009.

Note 5—Write-downs, reserves and recoveries, net

Write-downs, reserves and recoveries, net, consist of the following:

		For the three months ended								For the nine months ended
		September 30,								September 30,
		2009				2008				2009				2008
		(in millions)
Impairment of assets (a)		$	0.1			$	—			$	0.4			$	5.3
Customer loyalty program related expenses (b)			—				—				—				1.4
Loss on disposal of assets			0.2				1.0				0.6				1.7
Insurance proceeds			—				—				—				(0.2	)
Write-downs, reserves and recoveries, net		$	0.3			$	1.0			$	1.0			$	8.2

Note 6—Commitments and Contingencies

Redevelopment Agreement: In connection with our Lumière Place project, we have a redevelopment agreement which, among other things, commits us to oversee the investment of $50.0 million in residential housing, retail or mixed-use developments in the City of St. Louis within five years of the opening of the casino and hotel. Such investment can be made with partners and partner contributions and project debt financing, all of which count toward the $50.0 million investment commitment. We are also obligated to pay an annual fee of $1.0 million to the City of St. Louis beginning after our River City project opens. The redevelopment agreement also contains certain contingent payments in the event of certain defaults. If we and our development partners collectively fail to invest $50.0 million in residential housing, retail, or mixed-use developments within five years of the opening of the casino and hotel, we would be obligated to pay an additional annual service fee of $1.0 million in Year Six, $2.0 million in Years Seven and Eight, and $2.0 million annually thereafter, adjusted by the change in the consumer price index.

Guaranteed Maximum Price Agreement for River City: On August 8, 2008, we entered into a Guaranteed Maximum Price Agreement (the “Agreement”) with a general contractor for the construction of our River City project. Among other things, the Agreement establishes that the contractor will complete the construction of the casino for a maximum price of approximately $149 million and that the project will be substantially complete by January 31, 2010. The guaranteed maximum price set by the Agreement is a portion of the total budget of $357 million for the River City project. The budget includes items separate from those covered in the Agreement, such as construction work prior to entering into the Agreement; pre-opening and development costs; furniture, fixtures and other equipment; gaming equipment; consulting fees and information technology. The $357 million budget excludes capitalized interest currently estimated to be approximately $26.0 million, operating cash estimated to be approximately $10 million and the non-cash accrual for rent during the construction period.

Lease and Development Agreement: In connection with our River City project, we have a lease and development agreement with the St. Louis County Port Authority which, among other things, commits us to lease 56 acres for 99 years (not including certain termination provisions) for annual rent of the greater of $4.0 million or 2.5% of adjusted gross receipts (as defined in the lease and development agreement). We are required to invest a minimum of $375 million to: (a) construct a gaming and multi-use facility; (b) perform environmental remediation on the site of the project, which remediation has been completed; (c) contribute $5.1 million for the construction of community and recreational facilities, which amount has been paid; (d) develop and construct a hatch shell on the adjoining property; and (e) construct a roadway into the project, which construction is complete. We are also required to pay certain fees, potentially aggregating $20 million, unless we invest at least an additional $75 million into a second phase that would include a hotel with a minimum of 100 guestrooms and other amenities, such amenities to be mutually agreed upon by us and St. Louis County. The lease and development agreement provides that we must proceed with reasonable diligence to complete the gaming facilities by May 1, 2009, subject to delays beyond our control, including governmental approvals. We currently anticipate that the property will be completed in the spring of 2010 due to several factors which were beyond our control, including delays in receiving governmental approvals and delays caused by unfavorable weather conditions. The second phase must be opened within three years from August 11, 2009, or we are required to pay fees over five years beginning on the January 2 immediately following the expiration of three years. In each of the five subsequent years that the second phase is not opened, the amount of fees begins at $2.0 million for the first year and increases by $1.0 million each subsequent year: hence, $3.0 million in Year Two, $4.0 million in Year Three, $5.0 million in Year Four and $6.0 million in Year Five. As a result, the maximum amount of such fees that we would have to pay if the second phase is not completed is $20.0 million.

Employment and Severance Agreements: We have entered into employment agreements with certain employees, including our executive officers. The employment agreements require severance payments in the case of certain triggering events, including a change in control. As of September 30, 2009, the maximum aggregate amount that would be paid to this group of 37 employees if a triggering event occurred on September 30, 2009 following a change in control, where applicable, is approximately $44.2 million, which includes $2.9 million of the $3.5 million deferred bonus commitment discussed below.

In connection with Wade Hundley’s resignation as President of the Company, we entered into a separation agreement with him, dated as of June 5, 2008. Mr. Hundley is entitled to cash severance payments equal to approximately $1.4 million, payable in various installments over an 18-month period, of which approximately $138,600 remains to be paid as of September 30, 2009. Mr. Hundley is also entitled to approximately $373,000 representing amounts he had previously elected to defer plus earnings thereon, of which approximately $43,300 has been paid as of September 30, 2009.

Deferred Bonus Plan: We have a deferred bonus plan in which a portion of an employee’s bonus is deferred and paid in three equal annual installments contingent on the individual remaining employed by us, except employees who retire at age 65 or later who will receive their scheduled annual installments even if they are no longer employed by us. Payments are accelerated upon death, disability or a change in control, regardless of the age of the employee. We are expensing the deferred portion over the period of time leading up to the vesting date. As of September 30, 2009, the deferred bonus commitment was approximately $3.5 million.

Self-Insurance: We self-insure various levels of general liability, property, workers’ compensation and medical coverage. Self-insurance reserves include accruals for estimated settlements for known claims, as well as accruals for estimates of claims not yet made, which are included in “Accrued compensation” and “Other accrued liabilities” on the Condensed Consolidated Balance Sheets.

Legal

Insurance Litigation: In April 2006, we filed a $347 million insurance claim for our losses related to our former Casino Magic Biloxi property caused by Hurricane Katrina. In August 2006, we filed suit in the United States District Court for the District of Nevada against three of our insurance carriers, Allianz Global Risks US Insurance Company, Arch Specialty Insurance Company and RSUI Indemnity Company, related to such losses. Prior to the filing of that lawsuit, the various insurers comprising the first $100 million of coverage paid their respective policy limits to us for our Hurricane Katrina losses. On February 22, 2008, we settled with Arch Specialty Insurance Company, which provided $50 million of coverage, in exchange for its agreement to pay us approximately $36.8 million, which we received in March 2008. On May 9, 2008, we settled with Allianz Global Risks US Insurance Company, in exchange for its agreement to pay us approximately $48 million, which we received in June 2008. Allianz Global Risks US Insurance Company had previously paid us $5 million, which brought Allianz Global Risks US Insurance Company’s total payment on the claim to $53 million. RSUI Indemnity Company provides $50 million of coverage at the same layer and pari passu with the coverage provided by Arch Specialty Insurance Company and an additional $150 million of coverage between $250 million and $400 million of total coverage. To date, RSUI Indemnity Company has paid us approximately $2.0 million as a prepayment on the undisputed amount of the claim. We continue to pursue our claims against RSUI Indemnity Company for its respective share of our total hurricane-related damage and consequential loss in Biloxi. On October 20, 2008, we filed a motion for partial summary judgment on certain outstanding legal issues relating to the calculation of our business interruption loss for the claim. A hearing date has not yet been set on that motion.

As of September 30, 2009, the insurers have not designated the $192 million of advances toward our insurance claim as being specific to any particular part of the claim. Therefore, the advances have offset the book value of the destroyed assets and certain insured expenses. To the extent that the advances under the policy, excluding settlements previously discussed, exceed such expenses and book value, the difference (currently $18.3 million) is recorded as a deferred gain in “Other long-term liabilities” on our Condensed Consolidated Balance Sheets.

Our ultimate insurance claim and recovery amounts are based on replacement costs rather than book value and are unrelated to, computed differently from, and are substantially larger than the asset write-offs. Management believes that the replacement cost of the assets that were destroyed is substantially in excess of their book value. We are also insured for lost profits as a result of the damage, but will not book such profits until the claim is resolved. The deferred gain reflected on the Condensed Consolidated Balance Sheets primarily reflects the ongoing dispute with the remaining insurance carrier.

Jebaco Litigation: On August 9, 2006, Jebaco, Inc. (“Jebaco”) filed suit in the U.S. District Court for the Eastern District of Louisiana against Harrah’s Operating Co., Inc., Harrah’s Lake Charles, LLC, Harrah’s Star Partnership, Players LC, LLC, Players Riverboat Management, LLC, Players Riverboat II, LLC, and Pinnacle Entertainment, Inc. The lawsuit arises out of an agreement between Jebaco and Harrah’s (as successor in interest to the various Players defendants) whereby Harrah’s was obligated to pay Jebaco a fee based on the number of patrons entering Harrah’s two Lake Charles, Louisiana riverboat casinos. In November 2006, we acquired the Harrah’s Lake Charles subsidiaries, including the two riverboats. The lawsuit filed by Jebaco asserts that Harrah’s, in ceasing gaming operations in Lake Charles and ceasing payments to Jebaco, breached its contractual obligations to Jebaco and asserts damages of approximately $34.0 million. Jebaco also asserts that our agreement with Harrah’s violates state and federal antitrust laws. The lawsuit seeks antitrust damages jointly and severally against both us and Harrah’s and seeks a trebling of the $34.0 million in damages Jebaco alleges it has suffered. The defendants answered the complaint, denying all claims and asserting that the lawsuit is barred, among other reasons, because of the approval of our transaction with Harrah’s by the Louisiana Gaming Control Board and the lack of antitrust injury to Jebaco. In January 2007, all of the defendants moved to dismiss all of the claims of the complaint, which motions were heard on July 18, 2007. The motions to dismiss were granted with prejudice as to the federal antitrust claims and the state-law claims were dismissed without prejudice. Judgment of dismissal was entered on March 5, 2008. Jebaco has appealed the dismissal of the federal antitrust claims to the U.S. Court of Appeals for the Fifth Circuit. Further, on March 13, 2008, Jebaco filed a new lawsuit against the same parties in the Louisiana district civil court for Orleans Parish. This lawsuit seeks unspecified damages arising out of the same circumstances as the federal lawsuit based on claims for breach of the duty of good faith, negligent breach of contract, breach of contract, unfair trade practices, unjust enrichment, and subrogation to Harrah’s insurance proceeds. In May 2009, the Louisiana district civil court extended the stay of the state case indefinitely pending the decision of the Fifth Circuit on Jebaco’s appeal. On October 30, 2009, the Fifth Circuit affirmed the district court’s dismissal of the federal antitrust claims. Jebaco has not yet indicated if it intends to appeal the Fifth Circuit decision. We intend to move for dismissal of the state-court claims, but cannot predict at this time when that motion will be scheduled for hearing by the state district court.

Madison House Litigation: On December 23, 2008, Madison House Group, L.P. (“Madison House”) filed suit in Superior Court of New Jersey, Chancery Division, Atlantic County against the Company, ACE Gaming, LLC (“ACE”, a wholly owned subsidiary of the Company), and one other defendant. We acquired ACE as part of our acquisition of the entities owning the former Sands Hotel & Casino (the “Sands”) in Atlantic City, New Jersey in November 2006. The lawsuit arises out of a lease dated December 18, 2000 between Madison House as landlord and ACE as tenant for the Madison House hotel in Atlantic City, New Jersey. The lawsuit alleges in part that ACE breached certain obligations under the lease, including, among others, failure to operate and maintain the hotel as required by the lease, which was alleged to have resulted in substantial damages to the hotel. The lawsuit further alleges that the Company, as the ultimate parent entity of ACE, should be jointly and severally liable with ACE for the damages sought, and separately alleges independent actions against the Company as described more fully in the lawsuit. The lawsuit seeks specific performance of ACE’s obligations under the lease, including restoration of the hotel, as well as unspecified compensatory and exemplary damages, and attorneys’ fees, against the Company and ACE. ACE continues to make its payment obligations under the lease, which expires in December 2012.

On January 7, 2009, ACE petitioned the United States District Court for the District of New Jersey for an order compelling arbitration. On September 29, 2009, the federal court denied the petition and ACE has appealed to the United States Court of Appeals for the Third Circuit. On February 18, 2009, the trial judge in the state court action issued an order staying the arbitration, which we have also appealed. Oral argument in the appeal of the state court order has been set for December 16, 2009. Discovery in the state court lawsuit has commenced. On July 17, 2009, the state trial judge denied Madison House’s motion for partial summary judgment on the issue of whether ACE’s non-operation of the hotel following the closure of the Sands constituted a breach of the lease. While the Company cannot predict the outcome of this litigation, it intends to defend the matter vigorously.

Collective Bargaining Agreements: On May 17, 2006, we entered into a Memorandum of Agreement (the “MOA”) with Unite HERE Local 74 (“Union”) commensurate with our obligations under a development agreement with St. Louis that, among other things, provided union access to certain employees (“bargaining unit employees”) employed at our Lumière Place facility should the Union manifest its intent to organize those employees. Additionally, the MOA provided that we would recognize the Union as the exclusive bargaining representative of the bargaining unit employees if a majority of the employees (verified by a neutral arbitrator) indicated their desire to be represented by the Union by signing an authorization card.

On November 20, 2008, an arbitrator conducted a review of the authorization cards submitted by the Union and determined that a majority of the bargaining unit employees had indicated their desire to be represented by the Union. Consistent with the MOA, we recognized the Union as the exclusive bargaining representative for the bargaining unit employees. We met with the Union three times to negotiate a collective bargaining agreement; the last meeting was on February 18, 2009.

During March and April 2009, we received competing claims from three unions, each claiming to be the exclusive collective bargaining representative of our St. Louis employees, including a claim from one union that they were the successor to the Union. In response to the competing claims for recognition, we withdrew recognition from the Union because of a lack of continuity of representation. In May 2009, we notified the Union that the collective bargaining agreement for HoteLumière was no longer in effect and that the collective bargaining agreement for the President Casino was being terminated. In May 2009, one of the unions claiming to be the successor to the Union filed unfair labor practice charges with the National Labor Relations Board (“NLRB”) alleging, among other things, that we refused to bargain in good faith by refusing to engage in collective bargaining negotiations, by refusing to negotiate over the discharge of employees, and by withdrawing recognition and abrogating the terms and conditions of employment. In October 2009, the Union again changed its affiliation, and again requested recognition, which was denied. The charges are currently pending before the NLRB.

Indiana Tax Dispute: In 2008, the Indiana Department of Revenue commenced an income tax examination of the Company’s Indiana income tax filings for the 2005 to 2007 period. During June of 2009, the Company received an informal notification from the field agent for the Indiana Department of Revenue challenging whether income and gain from certain asset sales, including the sale of the Hollywood Park Racetrack in 1999, and other transactions outside of Indiana, such as the Aztar merger termination fee in 2006, which we reported on our Indiana state tax returns for the years 2000 through 2007, resulted in business income subject to apportionment, and proposed a potential assessment of approximately $11 million, excluding interest and penalties, of additional Indiana income taxes. We disagree with the position suggested by the field agent as we believe that the income associated with these items is non-business income and we are in discussion with Indiana tax authorities regarding those preliminary proposed adjustments.

President Casino: The President Casino operates on a vessel known as the Admiral. The hull of the Admiral was built in 1904. The current certification of the hull by the American Bureau of Shipping (“ABS”) expires on July 19, 2010, and the Admiral may not be used to carry passengers beyond that date without significant repairs and/or specific approval. On July 28, 2009, the Missouri Gaming Commission (“MGC”) held a public hearing to discuss our plans to address the expiration of the ABS certification in 2010. At such hearing, we proposed, subject to MGC review and ABS and other approvals, to replace the Admiral with a different vessel, specifically a riverboat built in 1993, which we acquired in 2006. Such boat has been out-of-service since Hurricane Rita in 2005. At this July 28, 2009 hearing, the Executive Director of the MGC, through counsel, made a recommendation that the MGC issue a ruling to prohibit Pinnacle from repairing, replacing or moving the Admiral. On August 26, 2009, the MGC approved a resolution that it is not practicable for us to repair the President Casino and prohibits us from relocating the President, or any other vessel, from the current location of the President Casino. The MGC’s resolution also provided that a new license would be needed to replace the President Casino with another vessel at its present site. On September 24, 2009, we filed a petition for judicial review with the Missouri Court of Appeals, Western District (“CAWD”) regarding the MGC’s resolution. The petition requests that the CAWD (1) set aside the MGC’s resolution; (2) stay the resolution, or alternatively, issue a writ of prohibition which would prevent the MGC from enforcing the resolution. On September 25, 2009, we filed a motion in the CAWD requesting that the CAWD (1) stay the enforcement of the resolution, (2) grant us the specific right, pending the appeal, to make and execute all necessary plans to repair or replace the President Casino and (3) order expedited briefing, argument, and review of the appeal. On October 7, 2009, the MGC responded to the motion to stay by arguing that the MGC is not trying to prohibit the repair of the Admiral and that whether the hull of the Admiral can be recertified is between us and the ABS. On October 15, 2009, the CAWD denied the motion to stay and set an accelerated briefing schedule for the appeal. On October 22, 2009 the MGC moved to dismiss our appeal.

We currently intend to repair the hull of the Admiral prior to the expiration of the ABS certification in July 2010. In the event that we are unsuccessful in repairing the hull of the Admiral prior to the expiration of the ABS certification and we are unsuccessful in our lawsuit and we have exhausted all other legal remedies, we could lose the gaming license for the President Casino. We intend to vigorously pursue all avenues that would allow us to continue the gaming activities of the President Casino, which we purchased in December 2006 at a cost of approximately $45 million.

Other: We are a party to a number of other pending legal proceedings. Management does not expect that the outcome of such proceedings, either individually or in the aggregate, will have a material effect on our financial position, cash flows or results of operations.

Note 7—Consolidating Condensed Financial Information

Our subsidiaries (excluding our Argentine subsidiary; a subsidiary that owns an aircraft; subsidiaries with approximately $66.0 million in cash and cash equivalents as of September 30, 2009 and certain non-material subsidiaries) have fully and unconditionally and jointly and severally guaranteed the payment of all obligations under the 7.50% Notes, 8.25% Notes, 8.75% Notes and 8.625% Notes, as well as our Credit Facility. Separate financial statements and other disclosures regarding the subsidiary guarantors are not included herein because management has determined that such information is not material to investors. In lieu thereof, we include the following:

										100% Owned				Consolidating				Pinnacle
		Pinnacle				100% Owned				Non-				and				Entertainment,
		Entertainment,				Guarantor				Guarantor				Eliminating				Inc.
		Inc.				Subsidiaries(a)				Subsidiaries(b)				Entries				Consolidated
		(in millions)
Statement of Operations
For the three months ended September 30, 2009
Revenues:
Gaming		$	—			$	219.2			$	8.2			$	—			$	227.4
Food and beverage			—				15.8				0.8				—				16.6
Other			—				21.3				0.1				—				21.4
			—				256.3				9.1				—				265.4
Expenses:
Gaming			—				134.4				3.2				—				137.6
Food and beverage			—				15.1				1.0				—				16.1
General and administrative and other			11.7				65.6				1.9				—				79.2
Depreciation and amortization			1.4				23.4				1.0				—				25.8
Write-downs, reserves and recoveries, net			—				0.3				—				—				0.3
			13.1				238.8				7.1				—				259.0
Operating income (loss)			(13.1	)			17.5				2.0				—				6.4
Equity in subsidiaries			18.3				1.5				—				(19.8	)			—
Loss on early extinguishment of debt			(8.8	)			—				—				—				(8.8	)
Interest (expense) and non-operating income, net			(22.5	)			3.8				—				—				(18.7	)
Income (loss) from continuing operations before inter-company activity and income taxes			(26.1	)			22.8				2.0				(19.8	)			(21.1	)
Management fee & inter-company interest			4.7				(4.7	)			—				—				—
Income tax (expense) benefit			(0.5	)			—				(0.1	)			—				(0.6	)
Income (loss) from continuing operations			(21.9	)			18.1				1.9				(19.8	)			(21.7	)
Income (loss) from discontinued operations, net of taxes			—				(0.2	)			—				—				(0.2	)
Net income (loss)		$	(21.9	)		$	17.9			$	1.9			$	(19.8	)		$	(21.9	)
Statement of Operations
For the nine months ended September 30, 2009
Revenues:
Gaming		$	—			$	670.0			$	24.5			$	—			$	694.5
Food and beverage			—				45.8				2.3				—				48.1
Other			0.1				57.5				0.4				—				58.0
			0.1				773.3				27.2				—				800.6
Expenses:
Gaming			—				398.9				9.2				—				408.1
Food and beverage			—				44.4				3.2				—				47.6
General and administrative and other			37.9				186.7				5.7				—				230.3
Depreciation and amortization			4.1				71.1				3.0				—				78.2
Write-downs, reserves and recoveries, net			—				1.0				—				—				1.0
			42.0				702.1				21.1				—				765.2
Operating income (loss)			(41.9	)			71.2				6.1				—				35.4
Equity in subsidiaries			77.9				2.1				—				(80.0	)			—
Gain on sale of equity securities			6.0				—				6.9				—				12.9
Loss on early extinguishment of debt			(8.8	)			—				—				—				(8.8	)
Interest (expense) and non-operating income, net			(59.9	)			8.8				(0.1	)			—				(51.2	)
Income (loss) from continuing operations before inter-company activity and income taxes			(26.7	)			82.1				12.9				(80.0	)			(11.7	)
Management fee & inter-company interest			11.4				(11.4	)			—				—				—
Income tax (expense) benefit			(1.0	)			—				(2.8	)			—				(3.8	)
Income (loss) from continuing operations			(16.3	)			70.7				10.1				(80.0	)			(15.5	)
Income (loss) from discontinued operations, net of taxes			—				(0.7	)			(0.1	)			—				(0.8	)
Net income (loss)		$	(16.3	)		$	70.0			$	10.0			$	(80.0	)		$	(16.3	)

										100% Owned				Consolidating				Pinnacle
		Pinnacle				100% Owned				Non-				and				Entertainment,
		Entertainment,				Guarantor				Guarantor				Eliminating				Inc.
		Inc.				Subsidiaries(a)				Subsidiaries(b)				Entries				Consolidated
		(in millions)
Statement of Operations
For the three months ended September 30, 2008
Revenues:
Gaming		$	—			$	207.2			$	14.9			$	—			$	222.1
Food and beverage			—				15.8				1.2				—				17.0
Other			—				23.3				0.4				—				23.7
			—				246.3				16.5				—				262.8
Expenses:
Gaming			—				124.1				8.1				—				132.2
Food and beverage			—				16.1				1.7				—				17.8
General and administrative and other			16.7				67.0				5.8				—				89.5
Write-down reserve and recovery			—				0.7				0.3				—				1.0
Depreciation and amortization			1.0				25.5				3.2				—				29.7
			17.7				233.4				19.1				—				270.2
Operating income (loss)			(17.7	)			12.9				(2.6	)			—				(7.4	)
Equity in subsidiaries			5.2				1.2				—				(6.4	)			—
Interest (expense) and non-operating income, net			(19.3	)			8.5				0.6				—				(10.2	)
Income (loss) from continuing operations before inter-company activity and income taxes			(31.8	)			22.6				(2.0	)			(6.4	)			(17.6	)
Management fee & inter-company interest			9.4				(9.4	)			—				—				—
Income tax (expense) benefit			10.6				—				(1.3	)			—				9.3
Income (loss) from continuing operations			(11.8	)			13.2				(3.3	)			(6.4	)			(8.3	)
Income (loss) from discontinued operations, net of taxes			—				2.5				(6.0	)			—				(3.5	)
Net income (loss)		$	(11.8	)		$	15.7			$	(9.3	)		$	(6.4	)		$	(11.8	)
Statement of Operations
For the nine months ended September 30, 2008
Revenues:
Gaming		$	—			$	633.9			$	46.1			$	—			$	680.0
Food and beverage			—				43.4				3.8				—				47.2
Other			0.2				57.5				0.9				—				58.6
			0.2				734.8				50.8				—				785.8
Expenses:
Gaming			—				384.2				25.8				—				410.0
Food and beverage			—				44.0				4.9				—				48.9
General and administrative and other			47.6				203.7				14.3				—				265.6
Write-down reserve and recovery			—				7.8				0.4				—				8.2
Depreciation and amortization			2.6				77.3				9.3				—				89.2
			50.2				717.0				54.7				—				821.9
Operating income (loss)			(50.0	)			17.8				(3.9	)			—				(36.1	)
Equity in subsidiaries			43.0				3.7				—				(46.7	)			—
Interest (expense) and non-operating income, net			(56.9	)			23.0				1.6				—				(32.3	)
Impairment of investment in equity securities			(8.4	)			—				(14.2	)			—				(22.6	)
Income (loss) from continuing operations before inter-company activity and income taxes			(72.3	)			44.5				(16.5	)			(46.7	)			(91.0	)
Management fee & inter-company interest			25.6				(25.4	)			(0.2	)			—				—
Income tax (expense) benefit			21.8				—				(3.2	)			—				18.6
Income (loss) from continuing operations			(24.9	)			19.1				(19.9	)			(46.7	)			(72.4	)
Income (loss) from discontinued operations, net of taxes			—				54.5				(7.0	)			—				47.5
Net income (loss)		$	(24.9	)		$	73.6			$	(26.9	)		$	(46.7	)		$	(24.9	)

										100% Owned				Consolidating				Pinnacle
		Pinnacle				100% Owned				Non-				and				Entertainment,
		Entertainment,				Guarantor				Guarantor				Eliminating				Inc.
		Inc.				Subsidiaries(a)				Subsidiaries(b)				Entries				Consolidated
		(in millions)
As of September 30, 2009
Balance Sheet
Current assets		$	34.1			$	97.7			$	74.6			$	—			$	206.4
Property and equipment, net			16.8				1,653.7				38.2				—				1,708.7
Other non-current assets			47.9				65.7				1.6				—				115.2
Investment in subsidiaries			1,740.4				22.8				10.0				(1,773.2	)			—
Inter-company			1.2				(0.2	)			—				(1.0	)			—
		$	1,840.4			$	1,839.7			$	124.4			$	(1,774.2	)		$	2,030.3
Current liabilities			54.8				148.7				4.3				—				207.8
Notes payable, long term			1,025.4				0.8				—				—				1,026.2
Other non-current liabilities			28.4				36.0				0.2				—				64.6
Inter-company			—				—				0.9				(0.9	)			—
Equity			731.8				1,654.2				119.0				(1,773.3	)			731.7
		$	1,840.4			$	1,839.7			$	124.4			$	(1,774.2	)		$	2,030.3
As of December 31, 2008
Balance Sheet
Current assets		$	17.9			$	85.3			$	64.1			$	—			$	167.3
Property and equipment, net			18.3				1,565.0				46.7				—				1,630.0
Other non-current assets			47.4				68.4				10.3				(4.2	)			121.9
Investment in subsidiaries			1,661.4				23.0				—				(1,684.4	)			—
Inter-company			1.2				0.2				—				(1.4	)			—
		$	1,746.2			$	1,741.9			$	121.1			$	(1,690.0	)		$	1,919.2
Current liabilities			38.6				129.4				6.5				0.1				174.6
Notes payable, long term			942.4				0.8				4.3				(4.3	)			943.2
Other non-current liabilities			25.9				36.0				0.2				—				62.1
Inter-company			—				—				1.4				(1.4	)			—
Equity			739.3				1,575.7				108.7				(1,684.4	)			739.3
		$	1,746.2			$	1,741.9			$	121.1			$	(1,690.0	)		$	1,919.2